-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TIUdlz17/ggFOn+Ym0FVZPTP0/0+4zcqbshB4H7CqV6Iw1A6IrUr7dXcZzYHMFBh dNh3wyYtecGjxh+g927DvQ== 0000944209-99-001295.txt : 19990811 0000944209-99-001295.hdr.sgml : 19990811 ACCESSION NUMBER: 0000944209-99-001295 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990810 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST REGIONAL BANCORP CENTRAL INDEX KEY: 0000356708 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 953582843 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-10232 FILM NUMBER: 99682259 BUSINESS ADDRESS: STREET 1: 1801 CENTURY PARK EAST CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: 3105521776 MAIL ADDRESS: STREET 1: 1801 CENTURY PARK EAST CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: GREAT AMERICAN BANCORP DATE OF NAME CHANGE: 19880309 10-Q 1 FORM 10-Q FOR QUARTER ENDED JUNE 30, 1999 Page 1 of 23 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 Quarter Ended June 30, 1999 ----------------------------------------------------------------- Commission File Number 0-10232 -------------------------------------------------------- FIRST REGIONAL BANCORP - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) California 95-3582843 - ------------------------------------------------------------------------------- State or other jurisdiction of IRS Employer incorporation or organization Identification Number 1801 Century Park East, Los Angeles, California 90067 - ------------------------------------------------------------------------------- Address of principal executive offices Zip Code (310) 552-1776 - ------------------------------------------------------------------------------- Registrant's telephone number, including area code Not applicable - ------------------------------------------------------------------------------- Former name, former address, and former fiscal year, if changed since last report Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- ---- APPLICABLE ONLY TO CORPORATE ISSUERS Indicate the number of shares outstanding in each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, No Par Value 3,018,608 -------------------------- ------------------------------ Class Outstanding on August 3, 1999 2 FIRST REGIONAL BANCORP ---------------------- INDEX -----
Page ---- Part I - Financial Information Item 1. Financial Statements Consolidated Statements of Financial Condition.................................... 3 Consolidated Statements of Income............ 5 Consolidated Statements of Cash Flows........ 7 Notes to Consolidated Financial Statements................................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................ 12 Part II - Other Information Item 1. Legal Proceedings............................ 20 Item 4. Submission of Matters to a Vote of Security Holders............................. 21 Item 6. Exhibits and Reports on Form 8-K............. 22 Signatures.................................................. 23
3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ----------------------------- FIRST REGIONAL BANCORP AND SUBSIDIARY ------------------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ---------------------------------------------- (In Thousands) (unaudited)
June 30, December 31, 1999 1998 -------- ------------ ASSETS ------ Cash and due from banks $ 15,448 $ 9,277 Federal funds sold 23,420 31,900 -------- -------- Cash and cash equivalents $ 38,868 $ 41,177 Investment securities 84,457 47,860 Interest-bearing deposits in financial institutions 5,091 10,143 Government guaranteed loans 357 521 Loans, net of allowance for losses of $2,326,000 in 1999 and $2,500,000 in 1998 100,170 91,180 Premises and equipment, net of accumulated depreciation 959 790 Accrued interest receivable and other assets 3,088 2,213 -------- -------- Total Assets $232,990 $193,884 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Liabilities: Deposits: Noninterest bearing $ 68,013 $ 61,964 Interest Bearing: Savings deposits 10,449 7,314 Money market deposits 82,053 49,991 Time deposits 47,676 51,154 -------- -------- Total deposits 208,191 170,423 Securities sold under agreement to repurchase 190 0 Note payable 1,387 1,463 Accrued interest payable and other liabilities 2,124 1,528 -------- -------- Total Liabilities 211,892 173,414
4
June 30, December 31, 1999 1998 -------- ------------ Shareholders' Equity: Common Stock, no par value, 50,000,000 shares authorized; 3,004,000 and 2,983,000 shares outstanding in 1999 and 1998, respectively 16,224 16,034 Less: Unearned ESOP shares; 139,000 and 146,000 outstanding in 1999 and 1998, respectively (1,315) (1,386) Total common stock, no par value; -------- -------- Outstanding 2,865,000 (1999) and 2,837,000 (1998) shares 14,909 14,648 Retained earnings 6,201 5,821 Accumulated other comprehensive income (12) 1 -------- -------- Total Shareholders' Equity 21,098 20,470 -------- -------- Total Liabilities and Shareholders' Equity $232,990 $193,884 ======== ========
The accompanying notes are an integral part of these statements. 5 FIRST REGIONAL BANCORP AND SUBSIDIARY ------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (In Thousands Except Per Share Amounts) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- REVENUE FROM EARNING ASSETS: Interest on loans $2,395 $1,930 $4,707 $3,605 Interest on deposits in financial Institutions 110 137 264 238 Interest on investment securities 889 407 1,576 988 Interest on federal funds sold 275 661 685 1,142 ------ ------ ------ ------ Total interest income 3,669 3,135 7,232 5,973 COST OF FUNDS: Interest on deposits 1,075 874 2,201 1,691 Interest on other borrowings 7 (1) 8 2 ------ ------ ------ ------- Total interest expense 1,082 873 2,209 1,693 ------ ------ ------ ------- Net interest income 2,587 2,262 5,023 4,280 PROVISION FOR LOAN LOSSES 25 12 (195) 24 ------ ------ ------ ------- Net interest income after provision for loan losses 2,562 2,250 5,218 4,256 OTHER OPERATING INCOME 427 217 793 387 ------ ------ ------ ------ OPERATING EXPENSES: Salaries and related benefits 1,290 861 2,495 1,655 Occupancy expense 170 130 326 245 Equipment expense 88 59 173 115 Promotion expense 68 45 95 80 Professional service expense 236 174 531 335 Customer service expense 182 233 391 495 Supply/communication expense 112 70 201 115 Other expenses 273 162 539 256 ------ ------ ------ ------- Total operating expenses 2,419 1,734 4,751 3,296 ------ ------ ------ ------ Income before provision for income taxes 570 733 1,260 1,347 PROVISION FOR INCOME TAXES 237 311 518 565 ------ ------ ------ -------
6
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1999 1998 1999 1998 ---- ---- ---- ---- NET INCOME $ 333 $ 422 $ 742 $ 782 ====== ====== ====== ====== EARNINGS PER SHARE (Note 2) Basic $ 0.11 $ 0.17 $ 0.26 $ 0.32 Diluted $ 0.11 $ 0.16 $ 0.25 $ 0.30
The accompanying notes are an integral part of these statements. 7 FIRST REGIONAL BANCORP AND SUBSIDIARY ------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (In Thousands) (Unaudited)
Six Months Ended June 30, ---------------- 1999 1998 ---- ---- OPERATING ACTIVITIES Net Income $ 742 $ 782 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses (195) 24 Provision for depreciation and amortization 82 63 Amortization of investment security and guaranteed loan premiums 39 0 Accretion of investment security discounts (93) (25) Increase in interest receivable (232) (3) Increase in interest payable 33 27 Increase (decrease) in taxes payable 60 (13) Net increase in other liabilities 503 138 -------- ------- Net cash provided by operating activities $ 939 $ 993 INVESTING ACTIVITIES Decrease (increase) in investments in time deposits with other financial institutions $ 5,052 $(3,409) Increase in investment securities (36,556) (8,008) Decrease in guaranteed loans 164 448 Net decrease (increase) in other loans (8,795) 11,747 Increase in premises and equipment (251) (120) Net increase in other assets (643) (22) -------- ------- Net cash (used in) provided by investing activities $(41,029) $ 636
8
Six Months Ended June 30, ---------------- 1999 1998 ---- ---- FINANCING ACTIVITIES Net increase in noninterest bearing deposits money market deposits, and other deposits $41,246 $10,030 Net increase (decrease) in time deposits (3,478) 5,113 Decrease in note payable (76) 0 Increase in securities sold under agreement to repurchase 190 0 Decrease in shareholders' equity (101) (36) ------- ------- Net cash provided by financing activities $37,781 $15,107 Increase (decrease) in cash and cash equivalents $(2,309) $16,736 Cash and cash equivalents, beginning of period 41,177 48,237 ------- ------- Cash and cash equivalents, end of period $38,868 $64,973 ======= =======
The accompanying notes are an integral part of these statements. 9 FIRST REGIONAL BANCORP AND SUBSIDIARY ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ June 30, 1999 (Unaudited) NOTE 1 - The consolidated financial statements include the accounts of First Regional Bancorp (the Company), a bank holding company, and its wholly-owned subsidiary, First Regional Bank (the Bank). Certain amounts in the 1998 financial statements have been reclassified to be comparable with the classifications used in the 1999 financial statements. In the opinion of the Company, the accompanying consolidated financial statements contain all adjustments (which consist only of normal recurring adjustments) necessary to present fairly the financial position as of June 30, 1999 and December 31, 1998 and the results of operations for the three and six month periods ended June 30, 1999 and 1998. While the Company believes that the disclosures presented are adequate to make the information not misleading, it is suggested that these financial statements be read in conjunction with the financial statements and the notes included in the Company's 1998 annual report. NOTE 2 - Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per Share." Accordingly, basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding during each period. The computation of diluted earnings per share also considers the number of shares issuable upon the assumed exercise of outstanding common stock options. All earnings per common share amounts presented have been restated in accordance with the provisions of this statement. A reconciliation of the numerator and the denominator used in the computation of basic and diluted earnings per share is:
Three Months Ended June 30, 1999 --------------------------------------------------- Weighted Average Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS --------- Income available to common shareholders $333,000 2,899,837 $ 0.11 Effect of Dilutive Securities ---------- Incremental shares from assumed exercise of outstanding options 99,376 (0.00) -------- --------- ------
10 Diluted EPS ----------- Income available to common shareholders $333,000 2,999,213 $ 0.11 ======== ========= ======
Three Months Ended June 30, 1998 ---------------------------------------------------- Weighted Average Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS --------- Income available to common shareholders $422,000 2,459,881 $ 0.17 Effect of Dilutive Securities ---------- Incremental shares from assumed exercise of outstanding options 170,520 (0.01) -------- --------- ------ Diluted EPS ----------- Income available to common shareholders $422,000 2,630,401 $ 0.16 ======== ========= ====== Six Months Ended June 30, 1999 ---------------------------------------------------- Weighted Average Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS --------- Income available to common shareholders $742,000 2,877,784 $ 0.26 Effect of Dilutive Securities ---------- Incremental shares from assumed exercise of outstanding options 115,422 (0.01) -------- --------- ------ Diluted EPS ----------- Income available to common shareholders $742,000 2,993,206 $ 0.25 ======== ========= ======
11 Six Months Ended June 30, 1998 ---------------------------------------------------- Weighted Average Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS --------- Income available to common shareholders $782,000 2,449,774 $ 0.32 Effect of Dilutive Securities ---------- Incremental shares from assumed exercise of outstanding options 179,442 (0.02) -------- --------- ------ Diluted EPS ----------- Income available to common shareholders $782,000 2,629,216 $ 0.30 ======== ========= ======
NOTE 3 - As of June 30, 1999 the Bank had a total of $1,203,000 in standby letters of credit outstanding. No losses are anticipated as a result of these transactions. NOTE 4 - The Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income, effective January 1, 1998. The standard requires that comprehensive income and its components be disclosed in the financial statements. The Company's comprehensive income includes all items which comprise net income plus the unrealized holding gains on available-for-sale securities. For the three and six month periods ended June 30, 1999 and 1998, the Company's comprehensive income was as follows:
Three Months Ended --------------------------------- June 30, 1999 June 30, 1998 ------------- ------------- (in thousands) Net Income $333 $422 Other comprehensive income (10) 0 ---- ---- Total comprehensive income $323 $422 Six Months Ended --------------------------------- June 30, 1999 June 30, 1998 ------------- ------------- (in thousands) Net Income $742 $782 Other comprehensive income (12) (8) ---- ---- Total comprehensive income $729 $774
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - ------------------------------------------------------------------------ RESULTS OF OPERATIONS --------------------- SUMMARY - ------- First Regional Bancorp did not conduct any significant business activities independent of First Regional Bank. The following discussion and analysis relates primarily to the Bank. As of June 30, 1999 total assets were $232,990,000 compared to $193,884,000 at December 31, 1998, an increase of $39,106,000 or 20%. Moreover, the June 30, 1999 asset level represents a $54,512,000 (30%) increase over the $178,478,000 which existed on the same date in 1998. The 1999 asset growth reflects a corresponding increase in total deposits of $37,768,000 or 22%, from $170,423,000 at the end of 1998 to $208,191,000 at June 30, 1999. While the deposit growth was centered in money market deposits, there was also significant growth in savings deposits and noninterest bearing deposits, while time deposits experienced some decline. The increase in money market deposits was due to both the deposits of Trust Administration Services Corp. (TASC), a new wholly owned subsidiary that provides administrative and custodial services to self-directed retirement plans and to a new program to provide deposit services to Bankruptcy Trustees. There were several changes in the composition of the Bank's assets during the first six months of 1999. The Bank's core loan portfolio increased by $8,826,000 during the six month period bringing the Bank's total loans to $100,527,000 at June 30, 1999 from the December 31, 1998 total of $91,701,000. The combined effect of the increase in loans and the growth in deposits was an increase in the level of total liquid assets. Of particular note, investment securities available for sale rose by approximately $36.6 million while interest-bearing deposits in financial institutions fell by $5.1 million. Federal funds sold fell by $8.5 million in order to accommodate the changes that took place in the rest of the balance sheet. The Company earned a profit of $333,000 in the three months ended June 30, 1999, compared to earnings of $422,000 in the second quarter of 1998 an decrease of 21%. The results for the six months ended June 30, 1999 were profits of $742,000 compared to a profit of $782,000 for the corresponding period of 1998. NET INTEREST INCOME - ------------------- Total interest income increased by $534,000 (17%) for the second quarter of 1999 compared to the same period in 1998, and increased by $1,259,000 (21%) for the six month period ended June 30, 1999 compared to the prior year as total earning assets were significantly higher (29%) in 1999 than in 1998. For the three months ended June 30, 1999 interest expense increased by $209,000 (24%) to $1,082,000 from the 1998 level of $873,000 as total deposits were significantly higher than in the same period in 1998. For the six months ended June 30, 1999 interest expense increased by $516,000 (30%) to $2,209,000 from the 1998 level of $1,693,000 as total deposits were over 30% higher than in the same period in 1998. The net result was an increase in net interest income of $325,000 (14%), from 13 $2,262,000 in the second quarter of 1998 to $2,587,000 for the second quarter of 1999 and increase in net interest income of $743,000 (17%), from $4,280,000 for the six months ended June 30, 1998 to $5,023,000 for the first six months of 1999. OPERATING INCOME - ---------------- Other operating income increased to $427,000 in the second quarter of 1999 from $217,000 in the three months ended June 30, 1998. For the first half of 1999 other operating income also increased significantly from $387,000 for the six months ended June 30, 1998 to $793,000 for the first six months of 1999. The Bank's new Trust Administration Services Corp. (TASC), a new wholly owned subsidiary that provides administrative and custodial services to self-directed retirement plans, had revenue that totaled $169,000 for the second quarter of 1999 and $267,000 for the six months ended June 30, 1999; there was no such revenue in the corresponding periods of 1998. The Bank's new merchant services operation, which provides credit card deposit and clearing services to retailers and other credit card accepting businesses, had revenue that totaled $116,000 for the second quarter of 1999 and $221,000 for the six months ended June 30, 1999 in contrast with $82,000 for the second quarter of 1998 and $134,000 for the six months ended June 30, 1998. The increase in this category of income was also in part due to increase in gains on sales of land, which increased from $42,000 in 1998's first half to $100,000 in the first half of 1999. Offsetting these income increases in part was reductions in gains realized on the sale of loans, which fell from $13,000 in the first half of 1998 to $0 in the same period of 1999. No gains or losses on securities sales were realized in the first half of 1999 or 1998. LOAN PORTFOLIO AND PROVISION FOR LOAN LOSSES - -------------------------------------------- The loan portfolio consisted of the following at June 30, 1999 and December 31, 1998:
June 30, December 31, 1999 1998 -------- ------------ (Dollars in Thousands) Commercial loans........................... $ 30,543 $24,811 Real estate construction loans............. 12,159 15,702 Real estate loans.......................... 49,915 46,251 Bankers acceptances........................ 9,936 6,681 Other loans................................ 495 797 -------- ------- Total loans........................... $103,048 $94,242 Less - Allowances for loan losses.......... 2,326 2,500 - Deferred loan fees.................. 552 562 -------- ------- Net loans............................. $100,170 $91,180 ======== ======= Government guaranteed loans held for sale.. $ 357 $ 521 ======== =======
14 The allowance for possible loan losses is intended to reflect the known and unknown risks which are inherent in a loan portfolio. The adequacy of the allowance for possible loan losses is continually evaluated in light of many factors, including loan loss experience and current economic conditions. The allowance for loan losses is increased by provisions for loan losses, and is decreased by net chargeoffs. While the recent economic recession in California appears to be giving way to full recovery, its impact on the payment performance of the Bank's borrowers has not been a significant factor in recent years. Management believes the allowance for possible loan losses is adequate in relation to both existing and potential risks in the loan portfolio. The Bank has historically evaluated the adequacy of its allowance for possible loan losses on an overall basis rather than by specific categories of loans. In determining the adequacy of the allowance for possible loan losses, management considers such factors as historical loan loss experience, known problem loans, evaluations made by bank regulatory authorities, assessment of economic conditions and other appropriate data to identify the risks in the loan portfolio. The allowance for possible losses was $2,326,000 and $2,500,000 (or 2.26% and 2.65% of gross outstanding loans) at June 30, 1999 and December 31, 1998 respectively. Reflecting the Company's ongoing analysis of the risks presented by its loan portfolio, provisions for possible loan losses were $25,000 and $(195,000) for the three and six month period ended June 30, 1999, compared to $12,000 and $24,000 for the same periods of 1998. For the three and six months ended June 30, 1999, the Company generated net loan recoveries of $10,000 and 21,000; by comparison, in the first half of 1998 the Company experienced net loan recoveries of $22,000. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan," effective January 1, 1995. This Statement defines an impaired loan as one for which it is likely that an institution will be unable to collect all amounts due (that is, all principal and interest) according to the contractual terms of the loan. The Statement generally requires impaired loans to be measured at the present value of expected future cash flows discounted at the effective interest rate of the loan, or, as an expedient, at the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. For the quarter ended June 30, 1999 the Company had identified loans having an aggregate average balance of $360,000 which it concluded were impaired under SFAS No. 114. The Company's policy is to discontinue the accrual of interest income on impaired loans, and to recognize income on such loans only after the loan principal has been repaid in full. Pursuant to this policy, the Company had already ceased to accrue interest on the impaired loans, and had established a general loss reserve for each of the loans which at June 30, 1999 totaled $178,000 for the loans as a group. As the loss reserves established by the Company were greater than those called for under SFAS No. 114, the adoption of SFAS No. 114 had no effect on the Company's financial statements as of June 30, 1999. 15 OTHER OPERATING EXPENSES - ------------------------ Other operating expenses increased in the first six months of 1999 compared to the same period of 1998, although some categories of expense actually decreased from the levels of previous periods. Other operating expenses rose to a total of $2,419,000 for the second quarter of 1999 from $1,734,000 for the three months ended June 30, 1998. For the six months ended June 30, 1999 other operating expenses totaled $4,751,000, an increase from $3,296,000 for the corresponding period in 1998. Salary and related benefits increased by $429,000, rising from a total of $861,000 for the second quarter of 1998 to $1,290,000 for the same period in 1999, and also rose for the six months ended June 30, to $2,495,000 from $1,655,000 in 1998. The increase principally reflects increases in staffing which took place in the first quarter of 1999 due to both the addition of the TASC operation as well as staffing in the new regional offices. The increase also reflects employee salary adjustments. Occupancy expense rose to $170,000 for the three months ended June 30, 1999 from $130,000 in the second quarter of 1998, the increases reflects the rent paid on the various facilities which house the Bank's new regional offices and the TASC operation; since the operations did not exist in the first six months of 1998 there were no corresponding expense items. Total other operating expenses rose in 1999 compared to the prior year, increasing from $743,000 for the second quarter of 1998 to $959,000 for the second quarter of 1999 and a corresponding increase from $1,396,000 for the first six months of 1998 to $1,930,000 for the same period of 1999. Other professional services expense increased in 1999 primarily in the area of legal expenses which increased by 55,000 from the six month period in 1998. The combined effects of the above-described factors resulted in income before taxes of $570,000 for the three months ended June 30, 1999 compared to $733,000 for the second quarter of 1998. For the six months ended June 30, 1999 income before taxes is $1,260,000 compared to $1,347,000 for the first six months of the prior year. In the second quarter, the Company's provision for taxes decreased from $311,000 in 1998 to $237,000 in 1999. For the six months ended June 30, 1999 the provisions were $518,000 compared to $565,000 in 1998. This brought Net Income for the second quarter of 1999 to $333,000 compared to $422,000 for the same period in 1998. For the six months ended June 30, net income in 1999 was $742,000, while 1998 net income through June 30 was $782,000. LIQUIDITY, SOURCES OF FUNDS, AND CAPITAL RESOURCES - -------------------------------------------------- The Company's financial position remains highly liquid. Total liquid assets (cash and due from banks, interest bearing deposits in financial institutions, investment securities available for sale, and federal funds sold) stood at 61.7% of total deposits at June 30, 1999. This level represents an increase from the 58.2% liquidity level which existed on December 31, 1998. In addition, at June 30, 1999 some $10.2 million of the Bank's total loans consisted of bankers acceptances or government guaranteed loans, both of which represent a significant source of liquidity due to the active secondary markets which exist for these assets. The ratio of net loans (including bankers acceptances and government guaranteed 16 loans) to deposits was 48.3% and 53.8% as of June 30, 1999 and December 31, 1998, respectively. Because customer deposits are the Company's principal funding source outside of its capital, management has attempted to match rates and maturities of its deposits with its investment and loan portfolios as part of its liquidity and asset and liability management policies. The objective of these policies is to limit the fluctuations of net interest income resulting from interest rate changes. The table which follows indicates the repricing or maturity characteristics of the major categories of the Bank's assets and liabilities as of June 30, 1999, and thus the relative sensitivity of the Bank's net interest income to changes in the overall level of interest rates. A positive "gap" for a period indicates that an upward or downward movement in the level of interest rates would cause a corresponding change in net interest income, while a negative "gap" implies that an interest rate movement would result in an inverse change in net interest income.
One month Six months One year Non-interest Floating Less than but less than but less than but less than Five years earning Category Rate one month six months one year five years or more or bearing Total ======== ======== ========= ============= ============= ============= ========== ============ ===== Fed funds sold 23,420 0 0 0 0 0 0 23,420 Time deposits with other banks 0 2,872 2,219 0 0 0 0 5,091 Investment securities 0 10,975 73,482 0 0 0 0 84,457 ------- ------- ------ ------ ------ ------ ------- ------- Subtotal 23,420 13,847 75,701 0 0 0 0 112,968 Loans 89,559 169 10,701 58 40 0 0 100,527 ------- ------- ------ ------ ------ ------ ------- ------- Total earning assets 112,979 14,016 86,402 58 40 0 0 213,495 Cash and due from banks 0 0 0 0 0 0 15,448 15,448 Premises and equipment 0 0 0 0 0 0 959 959 Other real estate owned 0 0 0 0 0 0 0 0 Other assets 0 0 0 0 0 0 3,088 3,088 ------- ------- ------ ------ ------ ------ ------- ------- Total non-earning assets 0 0 0 0 0 0 19,495 19,495 ------- ------- ------ ------ ------ ------ ------- ------- Total assets 112,979 14,016 86,402 58 40 0 19,495 232,990 Funds purchased 190 0 0 0 0 0 0 190 Repurchase agreements 0 0 0 0 0 0 0 0 ------- ------- ------ ------ ------ ------ ------- ------- Subtotal 190 0 0 0 0 0 0 190 Savings deposits 10,449 0 0 0 0 0 0 10,449 Money market deposits 82,053 0 0 0 0 0 0 82,053 Time deposits 0 26,184 20,181 1,054 257 0 0 47,676 ------- ------- ------ ------ ------ ------ ------- ------- Total bearing liabilities 92,692 26,184 20,181 1,054 257 0 0 140,368 Demand deposits 0 0 0 0 0 0 68,013 68,013 Other liabilities 0 0 0 0 0 0 3,511 3,511 Equity capital 0 0 0 0 0 0 21,098 21,098 ------- ------- ------ ------ ------ ------ ------- ------- Total non-bearing liabilities 0 0 0 0 0 0 92,622 92,622 ------- ------- ------ ------ ------ ------ ------- ------- Total liabilities 92,692 26,184 20,181 1,054 257 0 92,622 232,990 GAP 20,287 (12,168) 66,221 (996) (217) 0 (73,127) 0
17 Cumulative GAP 20,287 8,119 74,340 73,344 73,127 73,127 0 0
As the table indicates, the vast majority of the Company's assets are either floating rate or, if fixed rate, have extremely short maturities. Since the yields on these assets quickly adjust to reflect changes in the overall level of interest rates, there are no significant unrealized gains or losses with respect to the Company's assets, nor is there much likelihood of large realized or unrealized gains or losses developing in the future. For this reason, realized or unrealized gains or losses are not expected to have any significant impact on the Company's future operating results or liquidity. Deposits of custodial clients of retirement plans administered by Transcorp Pension Services, a corporate customer of the Bank, represented approximately 3% and 13% of the Bank's total deposits as of June 30, 1999 and December 31, 1998, respectively; in recognition of this the Bank has maintained a large portion of its assets in liquid form since the inception of the Transcorp relationship. In 1997 Transcorp merged with an affiliated company which already possessed custodial powers, and for this reason Transcorp sought to terminate its deposit relationship with the Bank. The Bank and Transcorp ultimately agreed to terminate the relationship under a settlement agreement which, among other things, provided for the transfer of the remaining deposits over an 18-month period beginning in March, 1998 and continuing through September, 1999. Because the Bank has invested the Transcorp deposits in highly liquid assets, it anticipates no difficulty in accommodating the deposit withdrawals over the 18- month transfer period. The Bank's investment portfolio continues to be composed of high quality, low risk securities, primarily U.S. Treasury or Agency securities and commercial papers. As mentioned above, no gains or losses were recorded on securities sales in the first half of 1999. As of June 30, 1999 the Company's investment portfolio contained gross unrealized losses of $18,000 and no unrealized gains. By comparison, at June 30, 1998 the Company's investment portfolio contained gross unrealized gains of $2,000 and no unrealized losses. The Company adopted SFAS No. 115 in 1994, with the result that the unrealized net loss (adjusted for taxes) of $12,000 at June 30, 1999 gave rise to a $12,000 decrease in the Company's shareholders' equity as of that date. Because the Company's holdings of securities are intended to serve as a source of liquidity should conditions warrant, the securities have been classified by the Company as "available for sale." The Company continues to enjoy a strong capital position. Total capital was $21,098,000 and $20,470,000 as of June 30, 1999 and December 31, 1998, respectively. The Company's capital ratios for those dates in comparison with regulatory capital requirements were as follows:
6-30-99 12-31-98 ------- -------- Leverage Ratio (Tier I Capital to Assets): Regulatory requirement 4.00% 4.00% First Regional Bancorp 9.44% 11.17%
18 The "regulatory requirement" listed represents the level of capital required for Adequately Capitalized status. In addition, bank regulators have issued risk-adjusted capital guidelines which assign risk weighting to assets and off-balance sheet items and place increased emphasis on common equity. The Company's risk adjusted capital ratios for the dates listed in comparison with the risk adjusted regulatory capital requirements were as follows:
6-30-99 12-31-98 -------- -------- Tier I Capital to Assets: Regulatory requirement 4.00% 4.00% First Regional Bancorp 12.36% 14.35% 6-30-99 12-31-98 -------- -------- Tier I + Tier II Capital to Assets: Regulatory requirement 8.00% 8.00% First Regional Bancorp 13.61% 15.60%
The Company believes that it will continue to meet all applicable capital standards. YEAR 2000 ISSUES - ---------------- The approach of the year 2000 presents potential problems to businesses, such as the Company, which utilize computers. Many computer systems in use today, particularly older computers and computer programs, may not be able to properly interpret dates after December 31, 1999 because they use only two digits to indicate the year in a date. For example, the year 2000 could be interpreted as the year 1900 by such systems. As a result, the systems could produce inaccurate data, or not function at all. In anticipation of this potential problem, the Company has developed a comprehensive plan to ensure that all of its systems are able to properly deal with the year 2000. The Company has assessed the ability of each system to properly perform, and implemented corrective measures when deficiencies were found. Relatively few required corrections were identified, and most of these situations would have been corrected in the normal course of business as part of the routine ongoing maintenance and updating of the Company's systems. At this point, the Company has achieved full year 2000 capability, and the cost was not material. As a lending institution, the Bank is also exposed to potential risk if borrowers and depositors suffer year 2000-related difficulties and are unable to repay their loans or maintain their deposits. The Bank is in the process of performing an assessment of the year 2000 readiness with both borrowers (as part of the loan granting or renewal process) and depositors. At this time, it is impossible to determine what impact, if any, the year 2000 will have on either the loan payment performance of the Bank's borrowers or the balances of key depositors. Thus far, however, none of the Bank's borrowers or depositors have reported the expectation of material adverse impacts as a result of the year 2000. 19 INFLATION - --------- The impact of inflation on the Company differs significantly from other industries, since virtually all of its assets and liabilities are monetary. During periods of rising inflation, companies with net monetary assets will always experience a reduction in purchasing power. Inflation continues to have an impact on salary, supply, and rent expenses, but the rate of inflation in general and its impact on these expenses in particular has remained moderate in recent years. 20 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- Litigation - ---------- The Company is a party as plaintiff to a number of lawsuits that have arisen in connection with the normal conduct of its banking business. It is management's opinion, based upon advice of legal counsel, that none of the pending litigation will have a materially adverse effect on the Company or the Bank. However, in late 1998, Mark Rubin, a director of the Company and its former vice chairman, filed suit against the Company, the Bank, and individual members of the Company's executive committee. Mr. Rubin alleges that his employment with the Company was wrongfully terminated and that the defendants also breached fiduciary duties owed to Mr. Rubin and committed acts of defamation and fraud against him. In his complaint, Mr. Rubin's suit seeks compensatory and punitive damages of approximately $59 million. In January 1999, Mr. Rubin submitted a statutory offer of compromise under Section 998 of the California Code of Civil Procedure offering to settle the lawsuit for $3 million. The Company rejected this settlement proposal. The Company believes the claims, as alleged, are without merit and has moved to dismiss Mr. Rubin's complaint. The Company has vigorously defended against Mr. Rubin's lawsuit and will continue to do so. Because the case is in its very early stages, it is not currently possible to determine what impact, if any, the resolution of this matter will have on the future financial condition and results of operations of the Company. 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ The company held its annual meeting of shareholders on May 20, 1999. The management slate consisted of five nominees listed below: H. Anthony Gartshore Gary Horgan Thomas E. McCullough Lawrence J. Sherman Jack A. Sweeney Mark Rubin nominated an alternate slate consisting of Frank Moothart, Sidney Morse and Mark Rubin. Management, using its proxies, elected four members to the Board of Directors: H. Anthony Gartshore Gary Horgan Lawrence J. Sherman Jack A. Sweeney Mr. Rubin using the proxies he solicited, elected one director: Mark Rubin The election was conducted under the rules of cumulative voting which were invoked by both Mr. Rubin and the management proxy holders. No other matters were submitted for shareholder vote. 22 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- Exhibits - -------- There are no exhibits to this report. Reports on Form 8-K - ------------------- No reports on Form 8-K were filed during the second quarter of 1999. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST REGIONAL BANCORP Date: August 3, 1999 /s/ Jack A. Sweeney ------------------------------------------ Jack A. Sweeney, Chairman of the Board and Chief Executive Officer Date: August 3, 1999 /s/ Thomas McCullough ------------------------------------------ Thomas McCullough, Chief Financial Officer EX-27 2 FINANCIAL DATA SCHEDULE
9 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 15,448,000 5,091,000 23,420,000 0 84,457,000 0 0 102,853,000 2,326,000 232,990,000 208,191,000 0 2,124,000 1,387,000 0 0 14,909,000 6,189,000 232,990,000 4,707,000 1,840,000 685,000 7,232,000 2,201,000 2,209,000 5,023,000 (195,000) 0 4,751,000 1,260,000 742,000 0 0 742,000 0.26 0.25 .046 348,000 0 0 0 2,500,000 0 21,000 2,326,000 2,326,000 0 0
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